As the IRS moves ahead with plans to leave no stone unturned in its quest to bring home tax revenue from all US persons wherever their money is lodged, Foreign Financial Institutions (FFIs) will start to feel the heat this year as some key FATCA deadlines approach. But what does this mean for corporate account holders with overseas interests?
Whilst it may not be a case of “one for you, nineteen for me”, as aggrieved Beatle, George Harrison, sang back in 1969, the inevitability of taxation drives some to almost super-human efforts to try to lighten their bills. But in an equal and opposite effort to ensure everyone pays their way, the US Internal Revenue Service (IRS) has been hard at work since 2010 ensuring its fellow citizens are tax-compliant wherever they may be in the world.
And by now, all Foreign Financial Institutions (FFIs) that need to be compliant with the Foreign Account Tax Compliance Act (FATCA) or one of the many bilateral US intergovernmental agreements (IGAs) to comply with its rules, should have registered with the IRS.
What is required?
FATCA is targeted primarily at obtaining the account information of ‘specified US persons’ from FFIs and its first reporting deadline is coming rapidly into view. On 31st March 2015 all FFIs in non-IGA jurisdictions, and FFIs in Model 2 IGA jurisdictions (requiring FFIs to report information directly to the IRS), will need to submit information on US-owned accounts; unless the client formally confirms its FATCA status it risks being subject to 30% withholding tax on its US-source income earnings.
When the second deadline arrives on 31st May 2015, FATCA reporting for FFIs will extend to many Model 1 IGA jurisdictions too (where FFIs report to their home tax authority for forwarding to the IRS). But the reporting obligations do not let up, increasing throughout 2016 and 2017. And, seemingly inspired by the IRS’ resolve, the UK is now implementing plans – dubbed ‘UK FATCA’ – for HMRC to collect information about reportable accounts held by UK taxpayers in its Crown Dependencies and Overseas Territories. Then, on 1st January 2016, many OECD members will begin to implement the Common Reporting Standard (CRS) as the first global regime for the automatic exchange of data; reporting for CRS starts in 2017.
“Only the US FATCA has a withholding element to it so far; the others are just reporting regimes,” says Nick Matthews, Global Head of Forensic Services at Kinetic Partners, a global professional services firm. “But all mean that every time a company opens an account, questions will be asked about its tax status.” Currently, the focus is on whether the client is a US or UK tax payer, but the CRS is a lot broader; early adopters of the CRS include 44 OECD signatories (no Asian countries so far). “We’re already seeing FIs putting these questions into their account opening forms now,” he notes.
Who will be affected?
FATCA terminology broadly dissects the affected universe into financial institution or non-financial institutions. FFIs have to comply but not all of their clients will be impacted. A non-financial institution in this context is also referred to as a non-financial foreign entity (NFFE), and these may be deemed either passive or active. An active NFFE is essentially a trading company; its passive counterpart will earn more than 50% of its income through investments. A FFI (as the paying agent and reporting entity) will therefore firstly want to know if its client is a FI or not and, if not, if it is an active or passive NFFE. The latter has to certify whether or not it has US owners.
FATCA (and similar rules) requires companies to confirm their status to each paying agent; if they do not, the agent may impose withholding tax. The threat of withholding tax means that companies should start monitoring receipts from their FIs (as their paying agents) to ensure they have not been withheld upon inappropriately and to seek a refund if this has happened. However, it is not clear yet whether the declaration must be for each payment due to be received or if a one-off or periodic signing is acceptable with the agent, nor is it clear whether the declaration is per account or per agent; different FIs will take different approaches.
The paying agent will require clients to sign a W-8BEN-E ‘Certificate of Status of Beneficial Owner for United States Tax Withholding and Reporting (Entities)’. “The problem with W-8BEN-E is that it potentially exposes the client to US law,” notes Matthews. For submission within IGA countries, a local version of the W-8BEN-E is therefore usually acceptable; in the UK, for example, HMRC permits firms to use their own version of self-certification to enable an entity to confirm that it is not a ‘US person’.
A declaration signed in good faith and submitted to the paying agent or FI usually implies corporate rather than individual responsibility but the risk inherent in accepting a manifestly incorrect statement will be carried by the paying agent/FI. Obviously, the self-certification form must include all the correct statements to be admissible; uncertainty may lead to withholding tax. The paying agent/FI may also impose its own rules regarding the professional level of acceptable signatory, such as requiring a high ranking C-level executive from compliance or tax or even the CEO to make the statement.
The good news is that FATCA and IGA documentation states that the categories of ‘specified US persons’ from which account information is required does not include listed entities. This clearly presents a major carve out for many corporates. The reason for this exemption is that the ownership of a listed entity is typically so broad and fluid that the underlying beneficial owners of any account earnings would be almost impossible for the company to track in real time. However, less has been said about non-financial, non-listed corporates and these may still be impacted by FATCA.
Of most concern at this stage then will be the status of a corporate treasury function with a service centre or in-house bank that handles financial assets. It seems to be “something of a grey area” when it comes to defining what constitutes a ‘financial group’ in terms of compliance requirements, says Matthews.
Referring to HMRC Guidance Notes (for the UK), it seems that holding companies and treasury centres of ‘financial groups’ will likely be classified as FIs, but may be deemed compliant with no need to register or report in their own right if they meet the conditions. Holding companies and treasury centres of non-financial groups will most likely not be seen as FIs and therefore will not need to register or report. As the definition of ‘financial group’ is fairly wide and complex, to avoid any uncertainty, firms should consider taking specific advice.
The bulk of the work required to comply with FATCA (and the other models that will surface over the coming months and years) seems to sit squarely at the feet of the FI community. But Matthews says corporates with overseas interests which are likely to be affected must engage with their FIs now to ensure their declaration of status is made accurately and in good time.
FATCA-type regimes are consistent with the efforts of the related tax authorities to reduce tax avoidance. They are not expected to affect client/FI relationships directly. But the IRS model in particular will reduce the ability of those clients that are impacted to shelter money without it being known to those authorities. “In revenue terms, says Matthews, “there are just fewer places to hide”.